FRM Part I · FRM Exam Part I · Trading Strategies
A trader sells a straddle with strike $80, receiving total premium $9. At expiry the stock price is $92. Ignoring discounting and transaction costs, what is the trader's net profit or loss?
The trader loses $3. The short call pays out $92 minus $80, or $12, the put expires worthless, and the $9 premium received offsets part of this, leaving a net loss of $3. Break-even is at $89 on the upside.
- ALoss of $3Correct
- BLoss of $12
- CProfit of $3
- DProfit of $9
Explanation
The short call is exercised: payout = 92 - 80 = $12. The put expires worthless. Net = 9 - 12 = -$3. Loss of $12 forgets the premium received; profit of $3 has the wrong sign.
Did you get it right without looking?
One question tells you little. A timed set on Trading Strategies shows your real accuracy, how long you take and where you lose marks.
More Trading Strategies questions
- A stock trades at $80. An investor buys the stock and writes a call with strike $85 for a $4 premium. What is the breakeven stock price at e…
- Compared with holding the underlying share alone, which describes the payoff of a covered call at expiration?
- A trader buys a European call with strike USD 50 for USD 3 and a European put with strike USD 50 for USD 2, both expiring in three months on…
- Which statement best describes the payoff profile of a protective put (long stock plus long put) compared with a covered call (long stock pl…
- A trader holds a long straddle on a stock with strike $100. Each option costs about $6, so total premium is $12. The trader believes implied…
- A trader holds a share priced at $100 and has written a call with strike $105 for $2. At expiration the share is at $90. Ignoring dividends …